Question

A. When a 20 percent change in income leads to a 2 percent change in consumption of a good, we calculate the income elasticity to be 0.10. We say this good is income inelastic (Enter your response rounded to two decimal places).

b. When a 20 percent change in income leads to a 30 percent change in consumption of a good, we calculate the income elasticity to be 1.50. We say this good is income elastic (Enter your response rounded to two decimal places).

c. A normal good is one for which the income elasticity is positive. Quantity demanded increases as income rises.

d. An inferior good is one for which the income elasticity is negative. Quantity demanded decreases as income rises.

Answer 1

The question centers on the concept of income elasticity of demand. It details scenarios where goods are income elastic (elasticity greater than 1), income inelastic (elasticity less than 1), and further explains the difference between normal and inferior goods in relation to income changes.

Step-by-step explanation:

The question provided asks about the concept of income elasticity of demand, which measures how much the quantity demanded of a good responds to a change in consumer incomes. For example:

• When a 20 percent change in income leads to a 2 percent change in the quantity demanded, the income elasticity is calculated to be 0.10 (0.02/0.20), indicating that the good is income inelastic since the elasticity is less than 1.
• In contrast, if a 20 percent change in income results in a 30 percent change in the quantity demanded, the income elasticity is 1.50 (0.30/0.20), signifying that the good is income elastic due to the elasticity being greater than 1.

Furthermore, the question references concepts of normal and inferior goods:

• A normal good has a positive income elasticity of demand, meaning the quantity demanded increases with rising income.
• The inferior good has a negative income elasticity of demand, where the quantity demanded decreases as income rises.